April 7, 2017
In the run up to the 2018 Farm Bill debate, the House Agriculture Committee has been holding regular hearings to examine key agricultural and food issues. This week, the Committee’s Commodity Exchanges, Energy, and Credit Subcommittee held a hearing focused on the farm credit programs. The backdrop for the hearing was was the depressed farm economy and the hardship that many farmers and facing. The Subcommittee explored current credit conditions and programs, and their availability to and impact on farmers and ranchers.
Testifying at this week’s hearing were representatives from several agricultural lending institutions, including the American Bankers Association, Independent Community Bankers Association, Farm Credit, and Farmer Mac. The only non-lender on the witness panel was Scott Marlow, a North Carolina-based farm advocate and Executive Director of the Rural Advancement Foundation International (RAFI), which is a member organization of the National Sustainable Agriculture Coalition (NSAC).
The panel discussed the importance of U.S. Department of Agriculture (USDA) Farm Service Agency (FSA) loan programs, which help farmers who aren’t adequately served by private financing to cover necessary operating and ownership costs. Marlow provided unique insights to the hearing, and conveyed to the Subcommittee the stories of both farmers who have found success in introducing new or alternative enterprises to their farm operations, as well as those experiencing a level of economic hardship unseen since the farm crisis of the 1980s.
“Our calls are up,” said Marlow, “especially from commodity farmers who have been turned down for their operating loans. The severity and sense of frustration of those calls have increased. No matter how we measure the severity of the need, whether the number of farmers or the level of crisis of the call, we know beyond a shadow of a doubt that this year is significantly worse than last year.”
Marlow’s testimony stressed the importance of credit access to the long-term viability of family farms. He also discussed the need for specific outreach to beginning and young farmers, who are among the most in need of tailored credit options to build and maintain successful operations.
Loan Funding Is Key
In his testimony, Marlow explained how the availability of crop insurance is inextricably linked to producers’ ability to secure credit. In fact, he stressed, a lack of access to crop insurance options (or access to appropriately tailored options) can effectively prevent producers from obtaining critical capital and operating financing – a problem that is particularly prevalent among beginning and underserved farmers.
Marlow stressed that three things must be in place for these FSA programs to be as effective and efficient as possible:
Due to persistently low commodity prices and the recent downturn in the farm economy, demand for FSA loan financing has increased significantly over the past few years. This is the case across almost every loan program. Last year, the situation became so dire that FSA completely ran out of funding for all loans excepting Direct Farm Ownership Loans.
In response to the shortfall, NSAC joined with the National Farmers Union, National Young Farmers Coalition and all of the major farm lenders – American Banking Association, Farm Credit Council, Independent Community Bankers of America, National Association of Credit Specialists, and the Opportunity Finance Network – to urge Congress to increase funding for federally assisted operating loans in fiscal year (FY) 2017. In September 2016, Congress allowed up to $185 million in additional lending for direct and guaranteed farm operating loans, taking nearly 2,000 approved loan applicants out of limbo and temporarily filling the FSA funding shortfall. By December, NSAC and our partners had succeeded in securing a short-term provision in the Continuing Resulting to allow USDA to make loans to farmers and ranchers in proportion to demand.
To Raise, or Not to Raise Loan Limits
The spike in demand and subsequent shortfall in FSA funding caused a panic in farm country. Several witnesses suggested that one way to avoid this type of crisis going forward would be to diversify lending by allowing both FSA and private lenders to meet loan demand in the years to come.
However, somewhat counterintuitively, several of the witnesses also expressed support for increasing loan limits in the next farm bill in order to address the increasing costs of modern production agriculture. Marlow questioned this line of thinking. He suggested that while it’s true that many farms have consolidated and increased in size over the last few decades – therefore requiring bigger, more advanced and more expensive farm equipment – saddling farmers with even greater amounts of debt when many are now unable to pay back their existing loans is not solid logic.
Moreover, Marlow was the only witness who expressed concern about the impact this change would have on the availability of financing, especially for new farmers. He cautioned the Subcommittee against giving into pressure to increase FSA loan limits across the board.
“If loan caps are increased across the board in the next farm bill in order to accommodate the needs of the largest farms. Family scale farms, including beginning and socially disadvantaged farmers, will ultimately feel the brunt of the impact and face fiercer competition for a limited pool of federal loan funding. Those borrowers deserve to be the focus of your concern.”
Marlow urged the Subcommittee to measure any policy changes against current program usage and demand, historical funding levels, and performance targets with respect to lending to beginning farmers and other underserved customers.
For all FSA loan programs (except Direct Farm Ownership loans), there has been excess demand at the current statutory loan caps in recent years. As noted above, demand for loan funding was especially high in 2016 and required an additional emergency appropriation to address the backlog of farmers seeking FSA financing to cover year-end operating expenses. Experts do not expect that 2017 will be any different from last year in this sense. FSA continues to face the very real threat of running out of loan funding again this year, unless Congress provides additional funding.
Focus on the Next Generation
While there certainly wasn’t consensus on the panel regarding the appropriate cap on loans, there was agreement that the availability of loan funding is critically important to supporting the next generation of farmers and ranchers. Both the Subcommittee Chair and Ranking Member noted their concern for young and beginning farmers in their opening remarks, with Congressman David Scott (D-GA) going so far as to say the “scarcity of young farmers” is a “national crisis.”
While some on the panel suggested that allowing new farmers to borrow more and go greater into debt was the key to success, Marlow questioned those lender-focused perspectives. He challenged the Subcommittee to take a broader look at and focus on addressing larger structural challenges in the upcoming farm bill.
Marlow argued that, if Congress and USDA are to play a role in attracting young people into farming, more funding and support will be needed for programs that mitigate risk for the entrepreneurial activities that will allow farmers to tap into new markets and generate more profit.
“USDA grants, like the Value-Added Producer Grant (VAPG) program, reduce the borrowing burden on the enterprise and increase lender comfort with the investment, leveraging private capital,” Marlow explained. “VAPG is a stellar program that increases market returns for farmers and deserves increased direct farm bill support in the new farm bill.”
In this way, every issue considered in the next farm bill will be affected in some way by the ability of farmers to access credit and financing.
“The only way that we as a nation are going to move the needle on beginning farmers, land transition, and farm viability,” said Marlow “is to find a way to add more value to the farm. In order to do that, aspiring farm entrepreneurs must have access to credit programs that encourage, rather than discourage, value-added agriculture, diversification, entrepreneurship, and innovation.”
This hearing sparked much debate over farm credit programs and what changes should or should not be made in the upcoming farm bill. The conversation, however, is far from over. NSAC, RAFI, and the countless farmers our member organizations work with every day will continue to engage in the these important policy discussions to ensure that loan programs – and the next farm bill – are designed by and for American family farmers.